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1
MACROECONOMICSAND THE GLOBAL BUSINESS ENVIRONMENT
The Wealth of NationsThe Supply Side
Copyright © 2005 John Wiley & Sons, Inc. All rights reserved.PowerPoint by Beth Ingram adapted by R Helg
3-2
Key Concepts
GDP GrowthTotal outputOutput per capita
Elements of GrowthLaborCapitalTotal Factor Productivity
3-3
The Importance of Economic Growth
"No society can surely be flourishing and happy, of which the far greater part of the
members are poor and miserable." --Adam Smith
2
3-4
GDP Growth
An increase over time in the quantity of goods and services produced by an economyRate of growth
Real GDP: adjusts for inflationReal GDP per capita: adjusts for size of population
3-5
World GDP per capita:the capitalist economic system at work
World GDP per capita(1990 International Geary-Khamis dollars)
0
1 000
2 000
3 000
4 000
5 000
6 000
1 1000 1500 1600 1700 1820 1900 2000
Source: Angus Maddison, Historical Statistics for the World Economy
3-6
Regional GDP per capita
3
3-7
GDP per capita: Europe vs. Chinathey are coming back!
3-8
Aggregate Real GDP
3-9
Real per capita GDP
4
3-10
Aggregate Real GDP
3-11
Real per capita GDP
3-12
Real GDP per capita, Top TenPPP US $
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
Nor
way
Irela
nd
Uni
ted
Sta
tes
Den
mar
k
Sw
itzer
land
Equ
ator
ial G
uine
a
Icel
and
Can
ada
Aus
tria
Net
herla
nds
Source: OECD, Author’s calculation
5
3-13
Real GDP per capita, Bottom TenPPP US $
Source: OECD, Author’s calculation
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
Zam
bia
Nig
er
Eth
iopi
a
Mad
agas
car
Gui
nea-
Bis
sau
Con
go, D
em.
Rep
. of t
he
Bur
undi
Tanz
ania
, U.
Rep
. of
Mal
awi
Sie
rra L
eone
3-14
Importance of Growth
Growing population
Improving standards of livingGDP per capitaLife expectancyPoverty reduction
3-15
Growing population
6
3-16
Improves standards of living
3-17
Life expectancy
3-18
Poverty reduction: monetary poverty
7
3-19
Poverty reduction: non-monetary poverty
1870 1913 1950 1995 Australasia 0.539 0.784 0.856 0.933 North America 0.462 0.729 0.864 0.945 Western Europe 0.374 0.606 0.789 0.933 Eastern Europe 0.278 0.634 0.786 Latin America 0.236 0.442 0.802 Eastern Asia 0.306 0.746 China 0.159 0.650 Sourth Asia 0.055 0.166 0.449 Africa 0.181 0.435
Source: Crafts (2000)
Human Development Index for geographic areas (weighted average)
3-20
Growth, poverty and inequality
3-21
Inequality and Growth: no systematic relationship
0.20
0.30
0.40
0.50
0.60
0.70
0.80
-10 -5 0 5 10 15 20
Growth Rate
Mor
e In
equa
lity →
8
3-22
World income inequality
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
18201850
18701890
19101929
19501960
19701980
1992
Within group inequality Between group inequality Total inequality
source: Bourguignon-Morrison
World Income Inequality 1: the long run (mean logarithmic deviation)
Continuously increased between 1820 and 1980.Between 1820 and 1930 within country inequality has been the most important component of world income inequality.After 1930 the leading component has become across country inequality.
3-23
World income inequality
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Within group inequality Betw een group inequality Total inequality
source: Sala-i-Martin (2002)
World Income Inequality 2: the last 30 years (mean logarithmic deviation)
After 1980 world income inequality has inverted its trend and started reducing. Mainly due to the fast convergence in per capita income between China (from 1980) and India (from 1990), on one side, and the developed countries, on the other.Note also the increase in the role played by within country inequality.
3-24
1999 GDP per capita
(US = $30600)
Years to attain US 1999 level Actual growth
rate (1990-99)
1% growth 3% growth 6% growth 9% growth
Germany $25350 20 years 7 years 4 years 3 years 1.5%
UK $22640 32 years 11 years 6 years 4 years 2.1%
Brazil $4420 196 years 66 years 34 years 23 years 1.7%
China $780 370 years 145 years 64 years 44 years 9.8%
Ethiopia $100 577 years 194 years 99 years 67 years 2.2%
Compounding is a wonderful thing…
9
3-25
Analysis of Growth
Capital(buildings,
infrastructure and machines)
Capital(buildings,
infrastructure and machines)
Total Factor Productivity
(technological knowledge
and efficiency)
Total Factor Productivity
(technological knowledge
and efficiency)Output (GDP)Output (GDP)
Labour(Hours worked, number
of workers)
Labour(Hours worked, number
of workers)
3-26
GDP per capita: decomposition
GDP per capita =GDP
Population
GDP Hours Number Employed Labor ForceHours Number Employed Labor Force Population
= × × ×
Labor ProductivityLabor Productivity
Average Hours WorkedAverage Hours WorkedEmployment RateEmployment Rate Labor Force
Participation RateLabor Force
Participation Rate
3-27
GDP per capita: decomposition
Labor productivityAverage hours workedEmployment rate = 1 – Unemployment RateLabor force participation rate
10
3-28
GDP per capita decomposition
3-29
Role of Inputs
More inputs means more outputDiminishing returns
1 worker = $10 in output2 workers = $18 in output3 workers = $24 in output
Marginal return is$8 in outputMarginal return is $6 in output
3-30
Production Function
Output = TFP × Capital Stocka × Labor Hours(1-a)
Real GDP
Total Factor Productivity
A parameter (a number, 0 < a < 1)
11
3-31
Cobb-Douglas example
0100200300400500600700800900
1000
0 500 1000 1500 2000 2500
Rea
l GD
P
Hours worked
TFP = 1Capital = 500a=0.6
3-32
0100200300400500600700800900
1000
0 500 1000 1500 2000 2500
Hours Worked
Rea
l GD
P
0.6 0.4(500) (Labor Hours)Output = ×
3-33
0
200400
600
8001000
1200
14001600
1800
0 500 1000 1500 2000 2500
Capital Stock
Output
0.6 0.4(Capital Stock) (1000)Output = ×
12
3-34
Implications for labor productivity
Output = TFP × Capital Stocka × Labour Hours(1-a)
Labor Productivity
aGDP CapitalTFP
Labor Hours Labor Hours⎛ ⎞
= ×⎜ ⎟⎝ ⎠
Production function in intensive form:
3-35
Changes in Labor Productivity
Total Factor ProductivityCapital per Labor Hour
3-36
Capital Stock per labor hour
Labo
r Pro
duct
ivity
500 1000
8
12
Labor Productivity = TFP × (Capital Stock/Labor Hours)a
13
3-37
Output Growth
% GDP per capita = % Labor ProductivityΔ Δ
And:
% Labor Productivity = % TFP % CapitalaLabor Hour
⎛ ⎞Δ Δ + × Δ ⎜ ⎟
⎝ ⎠
Assuming hours worked per capita constant we have:
3-38
Capital Stock per Labor Hour
Labor Productivity
k1
y1
y2
Output/Labor Hour = TFP × (Capital/Labor Hour)a
Increase in TFP
3-39
Growth in Output
Increase in labor supplyMay have no impact on GDP per capitaNot sustainable
Increase in capital stockMust increase at faster rate than labor
Increase in TFPNo diminishing returns in this framework
14
3-40
Case study 1:
The relative slow rate of growth of the European economy if compared to that of the US especially after the second half of the ’90s.
Economic growth: case study 1
3-41
Economic growth
After the WW II Europe converged to the US both in terms of GDP per capita and in terms of labour productivity (= GDP per hour worked).
This catching-up pattern experienced two major breaks in the last 30 years:
- Break 1: GDP per capita convergence ended after 1975
- Break 2: labour productivity convergence was reversed after 1995
3-42
Economic growth
15
3-43
There are two different interpretations of this:
a) The glass is half empty (Sapir Report)
b) The glass is half full (Blanchard)
Economic growth
3-44
Economic growth- Half empty
UE experienced:
strong convergence in GDP per capita for 2 decades and a half weak convergence in the ’70s
divergence after the first half of the ’90s
EU GDP in 1970 and in 2000 is approximatively the 70% of the US one
3-45
Economic growthHalf full
This is true, but it is valid only for output per capita.
The picture is much less negative when we consider output per hour worked: EU is approx 90% of the US one.
The difference is due to the fact that European employees work less hours during the year.
16
3-46
Economic growth
GDP per capita growth = Hourly labour productivity growth + Hour worked per capita growth
The difference is due to the fact the European employee work a smaller number of hours per year wrt to US citizens.
Δ%(GDP/Pop) =
= Δ%(GDP/Hours) + Δ%(Hours/Pop)
3-47
Economic growth
Half full (continues)
for example, between 1970 and 2000 the number of hours worked per person decreased by 23% in France and increased by 26% in the US
The Europeans have “decided” to increase leisure rather than income…
But this is not the only explanation available
3-48
GDP per capita: expanded decomposition
Labour Productivity(b)
Labour Productivity(b)
Average Hours Worked(d)
Average Hours Worked(d)
1-Unemployment Rate(e)
1-Unemployment Rate(e)
Labour ForceParticipation Rate
(f)
Labour ForceParticipation Rate
(f)
GDP/Pop = (GDP/Hours)* (Hours/Pop) =
(g)(g)
(a)(a)
PopPop..
PopLab.Force..
Lab.ForceN.Empl..
N.Empl.Hours..
HoursGDP. 6415
6415
−
−
∗∗∗∗=
17
3-49
Economic growthBlanchard’s explanation focus on the second term on the right (however, it’s decline explains only one third of the decline hoursper capita)
Other explanations:Prescott (2004): all decline in hours per capita was caused byhigher labour taxes in Europe
Ljungqvist-Sargent (2006): European welfare system increasesunemployment and reduces labour force partecipation
Alesina, Glaeser, Sacerdote (2006): decline in hours is mainly due to the political pressure by trade unions and left-wing parties toreduce hours and lower the retirement age
3-50
Economic growth
But in the last 10 years European performance in terms of hourly labour productivity has not been good …….
…..probably because of the slower diffusion of information technologies
3-51
Labour Productivity (GDP per hour worked) in 1999 US$
28
30
32
34
36
38
40
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
European Union United S tates
Economic growthsource: Ark (2004)
-4%
-10%
-5%
-8%
18
3-52 Case study 2:
Growth accounting for Japan, Germany, the UK, and the United States, 1913–1950.
3-53
Growth accounting for Japan, Germany, the UK, and the United States, 1950–1973.
3-54
Growth accounting for Japan, Germany, the UK, and the United States, 1973–1992.
19
3-55
Europe and Asia
Total Output:
Of Which
Capital Labor TFPGolden Age 1950-73France 5.0% 1.6% 0.3% 3.1%UK 3.0% 1.6% 0.2% 1.2%W. Germany 6.0% 2.2% 0.5% 3.3%Asian Miracle 1960-94
China 6.8% 2.3% 1.9% 2.6%Hong Kong 7.3% 2.8% 2.1% 2.4%Indonesia 5.6% 2.9% 1.9% 0.8%Korea 8.3% 4.3% 2.5% 1.5%Thailand 7.5% 3.7% 2.0% 1.8%Singapore 8.5% 4.4% 2.2% 1.5%
Europe relied on capital and TFP – Asian countries have relied on capital
3-56
Growth Accounting
JapanCapital growth important through outLabor, TFP important ’50 – ’73
USTFP important until ’73Labor important after ’73
UK and Germany rely less on labor
3-57
Growth AccountingAsian Tigers, 1966 - 1990
20
3-58
Growth accounting in emerging markets, 1960–1994.
3-59
Summary
Importance of GrowthSources of Growth
GDP per capitaHourly productivityNumber of hours worked
ProductivityCapital AccumulationTFP
Growth Accounting
Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained therein.
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